IDEAS home Printed from https://ideas.repec.org/a/eee/eneeco/v46y2014icp413-421.html
   My bibliography  Save this article

Macro determinants of volatility and volatility spillover in energy markets

Author

Listed:
  • Karali, Berna
  • Ramirez, Octavio A.

Abstract

We analyze the time-varying volatility and spillover effects in crude oil, heating oil, and natural gas futures markets by incorporating changes in important macroeconomic variables and major political and weather-related events into the conditional variance equations. We allow asymmetric responses to random disturbances in each market as well as to good and bad economic news related to the overall economy. Results show the presence of asymmetric effects in both random disturbances and macroeconomic variables. A bidirectional volatility spillover effect is found between natural gas and crude oil and between the natural gas and heating oil markets. Crude oil volatility is found to increase following major political, financial, and natural events. Seasonality and day-of-the-week effects are found in the crude oil and heating oil markets.

Suggested Citation

  • Karali, Berna & Ramirez, Octavio A., 2014. "Macro determinants of volatility and volatility spillover in energy markets," Energy Economics, Elsevier, vol. 46(C), pages 413-421.
    • Handle: RePEc:eee:eneeco:v:46:y:2014:i:c:p:413-421
    DOI: 10.1016/j.eneco.2014.06.004
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0140988314001376
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.eneco.2014.06.004?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Hiroaki Suenaga & Aaron Smith, 2011. "Volatility Dynamics and Seasonality in Energy Prices: Implications for Crack-Spread Price Risk," The Energy Journal, International Association for Energy Economics, vol. 0(Number 3), pages 27-58.
    2. Chang, C-L. & McAleer, M.J. & Tansuchat, R., 2010. "Analyzing and Forecasting Volatility Spillovers and Asymmetries in Major Crude Oil Spot, Forward and Futures Markets," Econometric Institute Research Papers EI 2010-14, Erasmus University Rotterdam, Erasmus School of Economics (ESE), Econometric Institute.
    3. Engle, Robert F. & Kroner, Kenneth F., 1995. "Multivariate Simultaneous Generalized ARCH," Econometric Theory, Cambridge University Press, vol. 11(1), pages 122-150, February.
    4. Chang, Chia-Lin & McAleer, Michael & Tansuchat, Roengchai, 2010. "Analyzing and forecasting volatility spillovers, asymmetries and hedging in major oil markets," Energy Economics, Elsevier, vol. 32(6), pages 1445-1455, November.
    5. Mackowiak, Bartosz, 2007. "External shocks, U.S. monetary policy and macroeconomic fluctuations in emerging markets," Journal of Monetary Economics, Elsevier, vol. 54(8), pages 2512-2520, November.
    6. Williams,Jeffrey C. & Wright,Brian D., 2005. "Storage and Commodity Markets," Cambridge Books, Cambridge University Press, number 9780521023399.
    7. repec:clg:wpaper:1999-04 is not listed on IDEAS
    8. Baillie, Richard T. & DeGennaro, Ramon P., 1990. "Stock Returns and Volatility," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 25(2), pages 203-214, June.
    9. Margaret E. Slade & Henry Thille, 2006. "Commodity Spot Prices: An Exploratory Assessment of Market Structure and Forward‐Trading Effects," Economica, London School of Economics and Political Science, vol. 73(290), pages 229-256, May.
    10. Baillie, Richard T & Myers, Robert J, 1991. "Bivariate GARCH Estimation of the Optimal Commodity Futures Hedge," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 6(2), pages 109-124, April-Jun.
    11. José A. Scheinkman & Jack Schechtman, 1983. "A Simple Competitive Model with Production and Storage," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 50(3), pages 427-441.
    12. Berna Karali & Gabriel J. Power, 2013. "Short- and Long-Run Determinants of Commodity Price Volatility," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 95(3), pages 724-738.
    13. Bollerslev, Tim, 1986. "Generalized autoregressive conditional heteroskedasticity," Journal of Econometrics, Elsevier, vol. 31(3), pages 307-327, April.
    14. Bollerslev, Tim & Engle, Robert F & Wooldridge, Jeffrey M, 1988. "A Capital Asset Pricing Model with Time-Varying Covariances," Journal of Political Economy, University of Chicago Press, vol. 96(1), pages 116-131, February.
    15. Apostolos Serletis & Ricardo Rangel-Ruiz, 2007. "Testing for Common Features in North American Energy Markets," World Scientific Book Chapters, in: Quantitative And Empirical Analysis Of Energy Markets, chapter 14, pages 172-187, World Scientific Publishing Co. Pte. Ltd..
    16. Sydney C. Ludvigson & Serena Ng, 2009. "Macro Factors in Bond Risk Premia," Review of Financial Studies, Society for Financial Studies, vol. 22(12), pages 5027-5067, December.
    17. Bessembinder, Hendrik & Chan, Kalok, 1992. "Time-varying risk premia and forecastable returns in futures markets," Journal of Financial Economics, Elsevier, vol. 32(2), pages 169-193, October.
    18. Apostolos Serletis & John Herbert, 2007. "The Message in North American Energy Prices," World Scientific Book Chapters, in: Quantitative And Empirical Analysis Of Energy Markets, chapter 13, pages 156-171, World Scientific Publishing Co. Pte. Ltd..
    19. Holbrook Working, 1948. "Theory of the Inverse Carrying Charge in Futures Markets," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 30(1), pages 1-28.
    20. Robert S. Pindyck, 2004. "Volatility and commodity price dynamics," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 24(11), pages 1029-1047, November.
    21. Stephen P. A. Brown & Mine K. Yucel, 2008. "What Drives Natural Gas Prices?," The Energy Journal, International Association for Energy Economics, vol. 0(Number 2), pages 45-60.
    22. Stephen P. A. Brown and Mine K. Yucel, 2009. "Market Arbitrage: European and North American Natural Gas Prices," The Energy Journal, International Association for Energy Economics, vol. 0(Special I), pages 167-186.
    23. Good, Darrel L. & Irwin, Scott H. & Isengildina, Olga, 2006. "The Value of USDA Situation and Outlook Information in Hog and Cattle Markets," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 31(2), pages 1-21, August.
    24. Mu, Xiaoyi, 2007. "Weather, storage, and natural gas price dynamics: Fundamentals and volatility," Energy Economics, Elsevier, vol. 29(1), pages 46-63, January.
    25. Lester G. Telser, 1958. "Futures Trading and the Storage of Cotton and Wheat," Journal of Political Economy, University of Chicago Press, vol. 66, pages 233-233.
    26. Robert S. Pindyck, 2001. "The Dynamics of Commodity Spot and Futures Markets: A Primer," The Energy Journal, International Association for Energy Economics, vol. 0(Number 3), pages 1-30.
    27. Robert J. Myers, 1991. "Estimating time‐varying optimal hedge ratios on futures markets," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 11(1), pages 39-53, February.
    28. Engle, Robert F, 1982. "Autoregressive Conditional Heteroscedasticity with Estimates of the Variance of United Kingdom Inflation," Econometrica, Econometric Society, vol. 50(4), pages 987-1007, July.
    29. Geman, Hélyette & Ohana, Steve, 2009. "Forward curves, scarcity and price volatility in oil and natural gas markets," Energy Economics, Elsevier, vol. 31(4), pages 576-585, July.
    30. Peter R. Hartley & Kenneth B Medlock III & Jennifer E. Rosthal, 2008. "The Relationship of Natural Gas to Oil Prices," The Energy Journal, International Association for Energy Economics, vol. 0(Number 3), pages 47-66.
    31. Hiroaki Suenaga & Aaron Smith & Jeffrey Williams, 2008. "Volatility dynamics of NYMEX natural gas futures prices," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 28(5), pages 438-463, May.
    32. Robert J. Myers & Steven D. Hanson, 1993. "Pricing Commodity Options when the Underlying Futures Price Exhibits Time-Varying Volatility," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 75(1), pages 121-130.
    33. Ang, Andrew & Piazzesi, Monika & Wei, Min, 2006. "What does the yield curve tell us about GDP growth?," Journal of Econometrics, Elsevier, vol. 131(1-2), pages 359-403.
    34. Arjun Chatrath & Hong Miao & Sanjay Ramchander, 2012. "Does the price of crude oil respond to macroeconomic news?," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 32(6), pages 536-559, June.
    35. French, Kenneth R. & Schwert, G. William & Stambaugh, Robert F., 1987. "Expected stock returns and volatility," Journal of Financial Economics, Elsevier, vol. 19(1), pages 3-29, September.
    36. Barry K. Goodwin & Randy Schnepf, 2000. "Determinants of endogenous price risk in corn and wheat futures markets," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 20(8), pages 753-774, September.
    37. Seung‐Ryong Yang & B. Wade Brorsen, 1993. "Nonlinear dynamics of daily futures prices: Conditional heteroskedasticity or chaos?," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 13(2), pages 175-191, April.
    38. Ng, Victor K & Pirrong, Stephen Craig, 1994. "Fundamentals and Volatility: Storage, Spreads, and the Dynamics of Metals Prices," The Journal of Business, University of Chicago Press, vol. 67(2), pages 203-230, April.
    39. Michael Ye & John Zyren & Joanne Shore, 2002. "Forecasting crude oil spot price using OECD petroleum inventory levels," International Advances in Economic Research, Springer;International Atlantic Economic Society, vol. 8(4), pages 324-333, November.
    40. Narayan, Paresh Kumar & Narayan, Seema, 2007. "Modelling oil price volatility," Energy Policy, Elsevier, vol. 35(12), pages 6549-6553, December.
    41. Thomas Lee & John Zyren, 2007. "Volatility Relationship between Crude Oil and Petroleum Products," Atlantic Economic Journal, Springer;International Atlantic Economic Society, vol. 35(1), pages 97-112, March.
    42. Rahman, Sajjadur & Serletis, Apostolos, 2010. "The asymmetric effects of oil price and monetary policy shocks: A nonlinear VAR approach," Energy Economics, Elsevier, vol. 32(6), pages 1460-1466, November.
    43. Ewing, Bradley T. & Malik, Farooq & Ozfidan, Ozkan, 2002. "Volatility transmission in the oil and natural gas markets," Energy Economics, Elsevier, vol. 24(6), pages 525-538, November.
    44. Bollerslev, Tim, 1987. "A Conditionally Heteroskedastic Time Series Model for Speculative Prices and Rates of Return," The Review of Economics and Statistics, MIT Press, vol. 69(3), pages 542-547, August.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Misund, Bård & Oglend, Atle, 2016. "Supply and demand determinants of natural gas price volatility in the U.K.: A vector autoregression approach," Energy, Elsevier, vol. 111(C), pages 178-189.
    2. Halkos, George & Tzirivis, Apostolos, 2018. "Effective energy commodities’ risk management: Econometric modeling of price volatility," MPRA Paper 90781, University Library of Munich, Germany.
    3. Ohana, Steve, 2010. "Modeling global and local dependence in a pair of commodity forward curves with an application to the US natural gas and heating oil markets," Energy Economics, Elsevier, vol. 32(2), pages 373-388, March.
    4. repec:ags:jrapmc:122315 is not listed on IDEAS
    5. Wang, Yudong & Wu, Chongfeng, 2012. "Forecasting energy market volatility using GARCH models: Can multivariate models beat univariate models?," Energy Economics, Elsevier, vol. 34(6), pages 2167-2181.
    6. Karali, Berna, 2012. "Do USDA Announcements Affect Comovements Across Commodity Futures Returns?," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 37(1), pages 1-21, April.
    7. Yudong Wang & Li Liu, 2016. "Crude oil and world stock markets: volatility spillovers, dynamic correlations, and hedging," Empirical Economics, Springer, vol. 50(4), pages 1481-1509, June.
    8. Chia-Lin Chang & Michael McAleer & Jiarong Tian, 2019. "Modeling and Testing Volatility Spillovers in Oil and Financial Markets for the USA, the UK, and China," Energies, MDPI, vol. 12(8), pages 1-24, April.
    9. Aaron Smith, 2005. "Partially overlapping time series: a new model for volatility dynamics in commodity futures," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 20(3), pages 405-422, March.
    10. Chevallier, Julien & Ielpo, Florian, 2017. "Investigating the leverage effect in commodity markets with a recursive estimation approach," Research in International Business and Finance, Elsevier, vol. 39(PB), pages 763-778.
    11. Yao, Wei & Alexiou, Constantinos, 2022. "Exploring the transmission mechanism of speculative and inventory arbitrage activity to commodity price volatility. Novel evidence for the US economy," International Review of Financial Analysis, Elsevier, vol. 80(C).
    12. Charles O. Manasseh & Jonathan E. Ogbuabor & Obiorah K. Obinna, 2016. "Volatility and Commodity Price Dynamics in Nigeria," International Journal of Economics and Financial Issues, Econjournals, vol. 6(4), pages 1599-1607.
    13. Chun, Dohyun & Cho, Hoon & Kim, Jihun, 2019. "Crude oil price shocks and hedging performance: A comparison of volatility models," Energy Economics, Elsevier, vol. 81(C), pages 1132-1147.
    14. Wai Mun Fong & Kim Hock See, 2001. "Modelling the conditional volatility of commodity index futures as a regime switching process," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 16(2), pages 133-163.
    15. Derek Bunn, Julien Chevallier, Yannick Le Pen, and Benoit Sevi, 2017. "Fundamental and Financial Influences on the Co-movement of Oil and Gas Prices," The Energy Journal, International Association for Energy Economics, vol. 0(Number 2).
    16. Pan, Zhiyuan & Wang, Yudong & Yang, Li, 2014. "Hedging crude oil using refined product: A regime switching asymmetric DCC approach," Energy Economics, Elsevier, vol. 46(C), pages 472-484.
    17. Efimova, Olga & Serletis, Apostolos, 2014. "Energy markets volatility modelling using GARCH," Energy Economics, Elsevier, vol. 43(C), pages 264-273.
    18. Martínez, Beatriz & Torró, Hipòlit, 2015. "European natural gas seasonal effects on futures hedging," Energy Economics, Elsevier, vol. 50(C), pages 154-168.
    19. Bessler, Wolfgang & Leonhardt, Alexander & Wolff, Dominik, 2016. "Analyzing hedging strategies for fixed income portfolios: A Bayesian approach for model selection," International Review of Financial Analysis, Elsevier, vol. 46(C), pages 239-256.
    20. Chang, Chia-Lin & McAleer, Michael & Wang, Yanghuiting, 2018. "Testing Co-Volatility spillovers for natural gas spot, futures and ETF spot using dynamic conditional covariances," Energy, Elsevier, vol. 151(C), pages 984-997.
    21. Tim Bollerslev & Ray Y. Chou & Narayanan Jayaraman & Kenneth F. Kroner - L, 1991. "es modéles ARCH en finance : un point sur la théorie et les résultats empiriques," Annals of Economics and Statistics, GENES, issue 24, pages 1-59.

    More about this item

    Keywords

    Asymmetric shocks; Energy markets; GARCH; Oil; Spillover effects; Volatility;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • Q41 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Demand and Supply; Prices
    • Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:eneeco:v:46:y:2014:i:c:p:413-421. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/eneco .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.